In capital companies the place where the will of the company takes shape is the general assembly. Not every resolution issuing from that organ is, however, beyond question. The Turkish Commercial Code No. 6102 allows resolutions afflicted by certain defects to be brought before the courts and gathers the grounds of annulment under three headings: contravention of the provisions of the Code, contravention of the articles of association and breach of the rule of good faith.
In practice the factors that determine the course of this action are clear enough. The right to bring the action is afforded not to everyone but to a limited circle of persons listed in the Code; the application is made, within a preclusive period of three months from the date on which the resolution was adopted, to the commercial court of first instance of the place where the company’s headquarters is situated. The bringing of the action imposes an obligation of announcement on the board of directors; where the application is made in bad faith, the claimants are held jointly and severally liable for the loss suffered by the company.
In this briefing note we assess, in the light of the provisions of the Turkish Commercial Code No. 6102 and of the case law, the grounds on which general assembly resolutions may be annulled, the parties to the action, the time limit and procedural rules to which it is subject, and the scope of the judgment to be given.
The General Assembly in Joint Stock Companies
The provisions relating to joint stock companies are found in the fourth part of the Turkish Commercial Code No. 6102; the provisions devoted to the general assembly are gathered in the fourth chapter of that part. Shareholders exercise their rights vis-à-vis the company through this organ.
The matters on which the general assembly may produce resolutions are not unlimited; it may rule only on matters in respect of which the Code or the articles of association expressly confer authority upon it. The Code has also treated certain duties and powers as non-transferable (Art. 408(2) of the Turkish Commercial Code No. 6102). Meetings may be held in ordinary or extraordinary form; the procedure for convening them, the setting of the agenda and the meeting and decision quorums are governed in detail by the Code.
Grounds for the Annulment of General Assembly Resolutions
The principal provision on the grounds of annulment is Article 445 of the Turkish Commercial Code No. 6102:
Turkish Commercial Code No. 6102, Art. 445
"The persons specified in Article 446 may bring an action for annulment, within three months of the date of the resolution, before the commercial court of first instance of the place where the headquarters of the company is situated, against general assembly resolutions that are contrary to the provisions of the law or of the articles of association and in particular to the rule of good faith."
As appears from the provision, a request for annulment may be founded on three separate bases: contravention of the legislation, contravention of the articles of association and breach of the rule of good faith.
Contravention of the Law
Resolutions adopted in breach of the provisions of the legislation may be made the subject of annulment. By way of example, a resolution adopted by disregarding voting rights of sufficient weight to alter the outcome of the resolution falls within this scope.
Contravention of the Provisions of the Articles of Association
Resolutions that run counter to the articles of association, which establish the internal order of the company, may also be annulled. Reliance on this ground is subject to two conditions: there must be valid articles of association in existence, and the provision alleged to have been breached must not be one that merely repeats the text of the Code as it stands. Where the articles of association simply reproduce a statutory rule, a contravention of it is characterised not as a breach of the articles of association but directly as contravention of the law, and the request for annulment is founded on that basis.
As regards the drafting and the mandatory content of the articles of association, a separate study entitled Articles of Association of a Joint Stock Company may be consulted.
Breach of the Rule of Good Faith
The will formed in the general assembly is expected to be consistent with the principle of good faith expressed in Art. 2 of the Turkish Code of Obligations No. 6098. Where the judge reaches a finding to the contrary, the resolution may be annulled. It has thus been held that resolutions preventing the distribution of profit in a company that regularly generates profit are to be annulled on the ground that they are incompatible with the rule of good faith.
Who May Bring an Action for Annulment?
Those who may apply to the court are determined exhaustively in the Code. This circle comprises three headings: the board of directors itself, each of the members of the board of directors, and the shareholders.
Shareholders
For a shareholder present at the meeting to acquire the status of claimant, that shareholder must have voted against the resolution and have had that dissent recorded in the minutes of the meeting. In certain cases, by contrast, the right of action arises independently of whether the shareholder attended the meeting and of how the vote was cast. In the following situations every shareholder may request annulment:
- For a shareholder who alleges that the opportunity to attend the meeting and to vote was unjustly obstructed and, moreover, that such obstruction affected the outcome of the resolution
- Where persons not entitled to attend the general assembly, or their representatives, took part in the meeting and voted
- Where the notice of the meeting was not given in accordance with the proper procedure or the agenda was not duly announced, and that deficiency affected the resolution
The Board of Directors
The board of directors is among the indispensable organs of the joint stock company. Where one of the defects listed above is present, an action for annulment may also be brought by that organ itself.
Each Member of the Board of Directors
Where implementation of the resolution adopted is such as to give rise to the personal liability of a member, that member may request annulment on his or her own. In practice this route is most often taken against resolutions refusing discharge. There is, however, an important limit: where a liability action has been brought against the member, the request for annulment is dismissed, since whether the refusal of discharge was justified will in any event be debated in those proceedings.
Judgment of the 11th Civil Chamber of the Court of Cassation dated 06.05.2015, File No. 2015/10277, Decision No. 2016/5229:
"The action concerns the request for a declaration that the resolutions adopted in respect of the claimant, who is a member of the board of directors of the respondent joint stock company, at the general assembly meeting of 25.04.2013 are of no effect, and for the annulment of item 3 concerning the approval of the activity report, the balance sheet, the income statement and the auditor’s report and of item 4 concerning the refusal of discharge. …. The court must first investigate whether there exists a decision to bring a liability action, or a liability action already brought, against the claimant on the basis of the resolution refusing discharge adopted at the general assembly. Where it is established that a liability action has been brought against the claimant, given that the resolution refusing discharge in respect of the claimant will be assessed in the liability action so brought, it must be accepted that the claimant has no legal interest in bringing this action and the action must be dismissed."
Time Limit for Bringing an Action for Annulment
The action must be brought within three months running from the day on which the resolution was adopted. That period is not a statute of limitations but a preclusive period; it is taken into account by the court of its own motion even if it is not raised by the parties. Since it is absolutely mandatory in character, it cannot be altered by a provision inserted into the articles of association.
The Court with Subject-Matter and Territorial Jurisdiction
The judicial body with subject-matter and territorial jurisdiction to resolve disputes concerning the annulment of general assembly resolutions is the commercial court of first instance of the place where the company’s headquarters is situated.
Announcement and Registration of the Action for Annulment
When the action is brought, an obligation of notification arises for the board of directors: the fact that the action has been brought and the date on which the hearing will be held are announced in accordance with the proper procedure and are also published on the company’s website.
Where the proceedings result in a judgment of annulment, it is likewise the duty of the board of directors to have a copy of the final judgment registered with the trade registry without delay and placed on the website.
Security Required from the Claimant
In order to secure the losses the company may suffer, the court may, on the application of the company, order the claimant party to provide security. The type and amount of the security are determined by the court in the exercise of its discretion.
Where the action has been brought by the board of directors, no security is required. Where, by contrast, the application comes from a shareholder or from one of the members of the board of directors, an order to that effect may be made on the application of the company. If the security is not deposited within the time allowed, the action is dismissed on procedural grounds.
Trial Procedure in the Action for Annulment
A request for annulment is examined under the simplified trial procedure. The court hearing the action may, after obtaining the views of the members of the board of directors on the matter, order the stay of implementation of the resolution in dispute.
Judgment of the 11th Civil Chamber of the Court of Cassation dated 19.09.2013, File No. 2013/12418, Decision No. 2013/16148:
"The minutes in question contain the resolutions refusing the discharge of manager S.D., removing him from the managership, electing A.K.O. as manager, and amending Article 10 of the company’s articles of association, which prescribes an aggravated quorum for the replacement of the company manager. Article 449 of the Turkish Commercial Code No. 6102 provides that, where an action for annulment or for a declaration of nullity is brought against a general assembly resolution, the court may, after obtaining the views of the members of the board of directors, order the stay of implementation of the resolution that is the subject of the action. Given the manner in which the extraordinary general assembly that is the subject of the request for an interim injunction was conducted, the voting quorum of those attending and the documents submitted to the file, the conditions for an interim injunction laid down in Articles 389 et seq. of the Code of Civil Procedure No. 6100 and in Article 449 of the Turkish Commercial Code No. 6102 were satisfied, and the dismissal of the request was therefore not found to be correct and required reversal…"
Action for Annulment Brought in Bad Faith
Article 451 of the Turkish Commercial Code No. 6102 provides that those who bring an action for annulment in bad faith are to be held jointly and severally liable for the losses suffered by the joint stock company. For that liability to arise, the action must first have been dismissed and it must then have been established that the application was founded on bad faith.
Recourse to litigation is sometimes had with the direct aim of causing loss to the company, and sometimes in order to obtain a personal advantage or to exert pressure on the company. Art. 451 of the Turkish Commercial Code No. 6102 was enacted precisely to forestall uses of this kind.
The Effect of a Judgment of Annulment
Once the court’s judgment on annulment becomes final, it binds not only the parties to the proceedings but all of the shareholders. The effect the judgment produces is retroactive.
Independent Legal Assessment
The annulment of general assembly resolutions is one of the areas of commercial law disputes in which time pressure is felt most acutely. Missing the three-month preclusive period results in dismissal of the action, however strong the contravention alleged on the merits may be. The content of the minutes of the meeting, the recording of the dissenting opinion and the obtaining of the notice documents must therefore be taken in hand on the very day the resolution is adopted.
The matters that come to the fore in the preparatory stage of the dispute may be listed as follows:
- Clarifying at the outset the ground on which the request for annulment is based, having regard to the distinction between the Code and the articles of association
- Determining whether the dissenting opinion was recorded in the minutes and, if it was not, which of the exceptional rights of action is to be relied upon
- Calculating the starting day of the three-month period by reference to the date of the resolution
- Assessing, by reference to the risk of loss arising from implementation of the resolution, whether a request for a stay of implementation is to be included in the pleading
- Anticipating in advance the possibility that the company will request security and the cost that this entails
- In cases of refusal of discharge, investigating whether a liability action has been brought against the same member
Independent Legal advises across the whole field of company law, from the management of general assembly processes in joint stock and limited liability companies to the conduct of actions for the annulment of resolutions.